Optimal Make-Take Fees for Market Making Regulation

35 Pages Posted: 22 May 2018

See all articles by Omar El Euch

Omar El Euch

Ecole Polytechnique, Paris

Thibaut Mastrolia

Ecole Polytechnique, Palaiseau - CMAP CNRS-UMR 7641 and Ecole Polytechnique

Mathieu Rosenbaum

Ecole Polytechnique, Palaiseau

Nizar Touzi

Ecole Polytechnique, Paris

Date Written: May 7, 2018

Abstract

We consider an exchange who wishes to set suitable make-take fees to attract liquidity on its platform. Using a principal-agent approach, we are able to describe in quasi-explicit form the optimal contract to propose to a market maker. This contract depends essentially on the market maker inventory trajectory and on the volatility of the asset. We also provide the optimal quotes that should be displayed by the market maker. The simplicity of our formulas allows us to analyze in details the effects of optimal contracting with an exchange, compared to a situation without contract. We show in particular that it leads to higher quality liquidity and lower trading costs for investors.

Keywords: Make-take fees, market making, financial regulation, high-frequency trading, principal-agent problem, stochastic control

JEL Classification: G14, G18

Suggested Citation

El Euch, Omar and Mastrolia, Thibaut and Rosenbaum, Mathieu and Touzi, Nizar, Optimal Make-Take Fees for Market Making Regulation (May 7, 2018). Available at SSRN: https://ssrn.com/abstract=3174933 or http://dx.doi.org/10.2139/ssrn.3174933

Omar El Euch

Ecole Polytechnique, Paris ( email )

1 rue Descartes
Paris, 75005
France

Thibaut Mastrolia

Ecole Polytechnique, Palaiseau - CMAP CNRS-UMR 7641 and Ecole Polytechnique ( email )

Route de Saclay
Palaiseau, 91128
France

Mathieu Rosenbaum (Contact Author)

Ecole Polytechnique, Palaiseau ( email )

Route de Saclay
Palaiseau, 91128
France

Nizar Touzi

Ecole Polytechnique, Paris ( email )

1 rue Descartes
Paris, 75005
France

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